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UNDERSTANDING FIXED INCOME MARKETS IN THE INDIAN CONTEXT

One of the most used and popular fixed income market security is certificate of deposits (fixed
deposits) but it is only a small tip of the iceberg of the fixed income market. The largest share
consists of the iceberg with Debt Markets. Indian Fixed income markets operate in different
instruments like Government-security, corporate bonds, Commercial papers (CP), Certificate of
Deposits (CD), Treasury bills (T-bills), State Development loans(SDL). Most of time Fixed-
income securities don’t get as much investor (or media) attention as the stock market does,
primarily because bonds don’t offer the same, exciting risk and return potential as stocks.

The size of the Indian fixed income capital market is estimated to be Rs. 103.49 lakh crore which
is around 86% of the Equity market as at 31st March 2017. The size of the Government and
Corporate securities market was Rs. 75.45 lakh crore and Rs.28.03 lakh crore respectively.
Following is a break-up of the size of the various components of the Indian Debt Capital Market:

S. No. Bond/ Security Type Amount(In CR) Percentage


1 Government Securities 46,52,880 45.0%
2 Special Securities 1,98,704 1.9%
3 Floating rate Bonds 61,232 0.6%
4 Treasury bills 3,34,802 3.2%
5 State Development loans 20,90,052 20.2%
6 UDAY Bonds 2,08,055 2.0%
7 Commercial Papers 3,97,970 3.8%
8 Certificate Of deposits 1,55,740 1.5%
9 Corporate bonds 22,50,000 21.7%
Total 1,03,49,435 100.0%

Source: CCIL, RBI, SEBI. This only includes capital market debt data.

The largest share of total fixed income market owns by two categories:

1. The government securities (G-Sec)- In order to finance its fiscal deficit, the Indian
government floats fixed income instruments and borrows money by issuing G-Secs that
are sovereign securities issued by the Reserve Bank of India (RBI) on behalf of the
Government of India.

Their markets contain of central government and state government securities,


Municipality Bonds, treasury notes.

2. The corporate Securities – In order to raise money from different investors, Company
issues corporate bonds again which they pay interest to investors at a fixed interval of
time.

Their market consists of Public State undertakings bonds (PSU) where the central
government owns more than 51% of the company and private corporate bonds which are
owned by the private entity.

CURRENT OUTLOOK OF INDIAN DEBT MARKET


As India is the third largest economy globally with a Purchasing Power Parity (PPP) GDP of
US$ 9.46 trillion as of 2017 and has grown (Real GDP growth y-o-y) on a sustained basis at an
average of 6.2% for last 33 years with no negative annual y-o-y growth rate. Due to the potential
of higher growth than the other developed economies, India has gain favour among investors as
attractive investment destinations for foreign institutional investors (FIIs) investing more than
2322.56 Billion INR in Government Fixed income during last five years. FIIs are flocking
towards Indian bonds as the confidence level of central bank and the government is at one of the
highest levels in recent years. India rated BBB- (Stable) by S & P & Baa3 (Positive) by Moodys,
not downgraded for the last 14 years. But other than FII investment and statutory requirement for
banks and other financial institutions, most of the government securities remain largely illiquid
in retail market because of lack in infrastructure and public awareness towards it.

In the corporate debt market, due to inertia and self-interests of major corporations, banks and
regulators towards Bank credit for financial needs, slow down the strengthening of liquidity in
the market. Total bank credit to corporate stood at Rs. 63 lakh crore as of 31st March 2017. This
implies that corporate borrow 2.7 times more from banks as compared to capital markets. This
over-reliance on banks and Non-banking financing corporations has inhibited the slowdown of
the corporate bond market in India. Creating a stronger bond market would be better for the
country's debt capital markets, Corporates, and overall investors in the long-run.
GOVERNMENT SECURITY VS CORPORATE BOND MARKET:
The debt capital market is dominated by securities issued by the Central and State Governments.
Government securities (G-Secs, SDL, UDAY, Special Securities, FRBs and T-Bills) constitute
about 73% of all securities outstanding. The remaining 27% are securities (Bonds, CPs and CDs)
issued by corporate. The Indian government securities market is 2.6 times the corporate
securities market. In developed economies, the value of corporate securities exceeds that of the
government securities. Also comparing with Emerging Nations, Indian corporate bond market is
under-penetrated. The outstanding corporate debt to GDP stood at 23% as at 31st March, 2017,
this is substantially lower than that of South Korea (77%), Malaysia (44%) and Singapore (32%).

A functional and liquid corporate bond market is essential for the sustenance and growth of all
economies as it plays an important role in supporting private sector growth through the efficient
allocation of capital, favourable funding terms, flexible term structures, financing at lower cost
and a scalable source of financing. The size of fixed income market is around two or three time
the equity market in developed countries, compared to that Indian market is in a very nascent
stage. In absolute terms, US and Chinese bond markets are respectively, 20 and 5 times the size
of the Indian bond market.

High liquid debt market renders financial stability to the economy by facilitating industrial and
infrastructure growth with direct capital raising, optimizing the costs of funding and diversifying
funding resources to large populations to diversify risk. The Indian bond market has grown
substantially over the past few years due to the efforts of the Government, the Reserve Bank of
India (RBI) and the Securities and Exchange Board of India (SEBI) by implementing new
policies for renovating debt markets.

DEVELOPMENT IN INDIAN FIXED INCOME MARKET


The first major significant change is the prohibition of RBI’s subscription to Government
securities in the primary market effective April 1, 2006, as mandated by the Fiscal Responsibility
and Budget Management (FRBM) Act. This completed the transition to a full market-based
issuance of Government securities rather than auction based. After that many changes happen to
strengthen Debt market in India to take care of the growing credit needs of the economy.

Some of the Latest development in Fixed income government security market are:
1. Debt Security settlement has migrated to DVP III by SEBI, enabling net settlement of
securities and funds, resulting in efficient liquidity management. It allows for retail
participants in the debt segment.
2. SEBI came out with a proposal that will require large corporates to raise 25 per cent
borrowings through corporate bond route from next financial year to deepen corporate
debt market.
3. Rollover of repos has been enabled thus furthering the participants' ability to manage
their fund positions more efficiently.
4. A uniform T+1 settlement cycle has been adopted for the settlement of outright
transactions in Government securities. This will give participants more processing time
for transactions and will thus enable better funds as well as risk management.
5. In order to further widen the repo market in Government Securities, its access has been
extended to listed companies and non-scheduled urban cooperative banks.

In conclusion, as our Economy grow, our financial markets grow, and the need for investment
grows, which cannot be completely fulfilled by bank credit. We have to develop proper
infrastructure to enable the most efficient way for allocation of resources through efficient
intermediation. The strong Debt market is the only efficient way to allocate capital in a most
seamless way to diversify the risk to the overall population and grow economy with 8% annual
growth rate. Deepening of Indian corporate bond market is critical to meet the increased funding
requirement. Increased participation of insurance companies and pension funds, Mutual funds
and retail investors help to deepen the Indian corporate bond market.

References:
India's Debt Markets - ASIFMA

White paper on Indian Fixed Income Market - Xetra

Recent Trends in the Indian Debt Market and Current Initiatives

Live Mint and Economics time, Business Standard articles